"QE2" has yet to set sail, yet already stock-market investors are acting like their ship has come in.
Since the Aug. 31 release of the minutes of the U.S. Federal Reserve Board's Aug. 10 monetary-policy meeting - at which the U.S. central bank made clear that it was considering a second round of quantitative easing - the S&P 500 has surged 10 per cent. The prospect of the Fed injecting cash into the system, speeding up the flow of low-interest-rate money, is being taken as a panacea for all that ails equities.
"The goal of QE is to drive interest rates lower, with dollar weakness as a natural spillover from the low interest rates," said Myles Zyblock, chief institutional strategist and director of capital markets research at RBC Dominion Securities, in a report this week. "In theory, both dynamics stimulate [U.S. economic]activity."
Anything that stimulates economic activity is a positive for earnings growth, which is a key factor behind the market rally. The idea that the Fed will take decisive action to ward off deflation - a notorious killer of stock markets - isn't hurting, either.
But the dollar weakness also does something else for stocks, Mr. Zyblock noted - something that has already benefited some U.S. stocks much more than others.
A further decline in the already-weakened greenback is no great blessing for companies that rely on imported goods or are heavy consumers of commodities - whose U.S.-dollar prices typically go up when the currency goes down.
But for U.S. companies with large foreign operations, a weaker dollar is decidedly good news. It means their non-U.S. revenues will rise when converted into U.S. currency, fuelling substantial foreign-exchange-driven gains to their bottom line.
Mr. Zyblock said investors have already recognized this, "incrementally favouring stocks with relatively high foreign exposure."
In the past month alone, he said, the shares of S&P 500 companies that derive more than 50 per cent of their revenues from outside the United States have outperformed those with less than 50 per cent foreign revenues by more than four percentage points. And as the chart that accompanies this column shows, the underperformance of the less-than-50-per-cent group relative to the more-than-50-per-cent group has closely tracked the U.S. dollar's movements; whenever the dollar drops, investors favour high foreign exposure.
With this in mind, Mr. Zyblock's research team pulled together a short list of 10 U.S. stocks, representing a wide range of sectors, that both derive more than half of their revenues from outside the United States and rate highly on RBC's quantitative stock-rating system. (The quant system, broadly speaking, looks for low valuations, strong growth numbers and consistent earnings strength.) This list, which we've included here, form a mini-portfolio of what Mr. Zyblock terms "names likely to benefit from continued dollar weakness."